Performance Management Solutions

Product Profitability Analysis

Product profitability analysis requires that all relevant costs are traced to products and then matched to their corresponding revenues. Such analysis can then inform a wide range of management decisions such as product pricing and product portfolio analysis.

Product pricing

In the face of growing levels of competition, more businesses can reasonably be described as "high volume - low margin". In this situation, pro-active cost management takes on a higher profile as does the ability to better inform product-pricing decisions.

Informed by a robust Activity Based Costing (ABC) analysis, managers can be much better placed to understand where they should be trying to increase prices and where there is scope to increase sales volumes by reducing prices.

Pricing correctly will maximize the return on the effort of the enterprise and reinforce its long term prosperity.

Product portfolio analysis

That some products are more profitable than others, and that the profitability will vary according to the product life cycle is widely understood. Despite this there is constant pressure to allow product ranges to expand to "better meet the needs of the market".

The risk of this practice is that profit-weak products are often not removed at the same rate that new products are added.

The result of such product proliferation is revenue growth that is matched by static or declining profitability.

The remedy is to develop a clear understanding of product profitability and to understand the profit and cost implications of deleting products from the range and the associated commercial risks and implications.